Centralized services cannot be disallowed merely because they were incurred by group entity: ITAT

The assessee, Regus South Mumbai Business Centre Private Limited, is engaged in providing workplace solutions such as executive suites and conference facilities. For AY 2012–13, it claimed deduction of Rs. 21.06 lakh towards “cost allocated from group company,” being charges paid to its group entity for centralized services like HR, finance, IT, and marketing support.

During assessment proceedings, the Assessing Officer disallowed the entire expenditure on the ground that the costs were not directly incurred by the assessee and were allocated proportionately without establishing a clear nexus with its business. The AO also questioned the verifiability and necessity of such expenses. The CIT(A) upheld the disallowance, observing that the assessee failed to demonstrate a direct link between the allocated costs and its business operations, and that allocation across group entities without precise identification does not justify allowability. Aggrieved, the assessee filed an appeal before the ITAT.

Central Issue: Whether cost allocation charges paid to a group company for centralized services are allowable as business expenditure under Section 37(1) of the Income Tax Act.

Tribunal’s Decision: The ITAT Mumbai allowed the appeal of the assessee and deleted the disallowance. The Tribunal held that the disallowance was based on general assumptions without material to prove that the expenditure was bogus, excessive, or not incurred for business purposes. The assessee had substantiated the centralized service arrangement through an inter-company agreement and showed that the expenditure was incurred and recorded in its books.

The Tribunal observed that centralized services and cost-sharing are recognized commercial practices, and such expenses cannot be disallowed merely because they were incurred by another group entity. Allocation based on number of workstations was held to be reasonable. Therefore, the disallowance of Rs. 21.06 lakh was deleted and the appeal of the assessee was allowed.

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